- Market complacency hit new highs
this week as both the DJIA and the S&P500 both pushed out to fresh record
highs this week. Meanwhile, the VIX dipped below 10.40, its lowest level since
early 2007.

The Fed decision on Wednesday held
no surprises, although during the post-decision press conference Fed Chair
Yellen qualified her definition of the "considerable period" between
the end of the taper and rate hikes.

Yellen said there was "no
mechanical formula" defining this span of time, further distancing herself
from the gaff at her first press conference when she suggested it would be
about six months. Markets took the statement as dovish, greatly aiding positive
sentiment.

The bleeding continued in Iraq and
Ukraine all week, but neither conflict managed to distract markets as they have
been able to do in the past. For the week, the DJIA rose 1%, the S&P500
climbed 1.4%, and the Nasdaq gained 1.3%.

- The US May CPI report showed prices at a key threshold: the core CPI figure
hit 2.0%, which suggested inflation is getting close to the Fed's target rate.
On a sequential basis, monthly core CPI increased at its fastest pace since
August 2011 while the y/y figure is at the 2.0% level for the first time since
February 2013.

Keep in mind that the Fed watches
the PCE series as its main gauge of inflation; in updated economic forecasts
accompanying Wednesday's decision, the Fed slightly increased its 2014 PCE
forecast to 1.5-1.7% from 1.5-1.6%. The May PCE data will be released on June
26th. In her post-decision press conference, Yellen said the CPI data was
"noisy," which some people believed meant she wasn't too worried
about inflation at the moment.

- Housing starts fell 6.5% in May,
for the first decline in the series in four months, while the April figures
were revised slightly lower. The decline was broad-based across regions and
type of construction. Single-family housing starts fell 5.9%, while multifamily
starts fell 7.6%. Permits declined as well, led lower by a sharp decline in
multi-family permits.

- Conflict in Iraq and Ukraine continued without interruption. After being
knocked from the headlines by ISIS's offensive in Iraq, the conflict in eastern
Ukraine was heating up again. NATO Chief Rasmussen warned that Russia was
boosting troop levels on Ukraine's borders and there were reports of Russia
sending tanks, armored vehicles and artillery over the border to resupply
pro-Russia insurgents.

Ukraine President Poroshenko
declared a one week unilateral cease-fire, however Russia and many other
observers see it as a demand for surrender by the rebels, and not the start of
a negotiation. In Iraq, government forces seemed to check ISIS's advance north
of Bagdad as the Baiji refinery traded hands all week. Prime Minister Maliki
appeared to lose support of Iran, the US and even Grand Ayatollah Ali
al-Sistani, as all three power centers signaled a new government was needed to
cope with the new situation on the ground. Energy prices did not move any
higher, with front-month WTI spending most of the week around $107. Gold spiked
3.3% on Thursday, hitting one-month highs, a move attributed to geopolitical
tensions, an accommodative Fed, and the continued unwinding of Chinese
commodity financing deals.

- Amazon unveiled its new smartphone platform this week, dubbed the Fire Phone.
As expected, it features multiple cameras that support a 3D display, but the
more interesting aspects of the new device went well beyond graphical gimmicks.
The device's Firefly system allows users to take a picture of any product from
books to barcodes and have the device find the product on Amazon.com. Firefly
also reads text and numerals via a strong character recognition system, and can
identify music and open songs on various services. Fire Phone sells for about
the same as the iPhone: $200 with a two-year contract from AT&T, although
the devices have more internal storage.

- In earnings, FedEx had a very
good fourth quarter and offered a strong initial FY15 forecast. BlackBerry
continued to restructure its business in its first quarter for a more modest
market position. The firm's margins rose firmly for a second consecutive
quarter and its quarterly losses continue to fall. Rite Aid's first quarter
revenue declined 50% y/y thanks to higher drug costs and steeper reimbursement
rate reductions, although comps held up well. After reporting another
disappointing quarter, Darden charted a course for its post-Red Lobster
business, offering an initial view of its FY15 outlook. Oracle missed
expectations and analysts were skeptical of its touted transition into cloud
services.

- Steel names Nucor, AK Steel and Steel Dynamics provided guidance on second
quarter results. AK Steel and Nucor missed expectations: AK blamed lingering
effects of the winter weather and hedging losses, Nucor said imports continue
to negatively impact pricing and margins. Meanwhile Steel Dynamics's outlook
was in line with consensus views. STLD said profitability would be higher in
the quarter on a sequential basis as both shipments and metal spreads are
improving, despite significantly increased import activity. Also, ConAgra
trimmed its fourth quarter guidance slightly due to volume declines in its
Consumer Foods segment, as well as weak profits for the Private Brands segment.

- Another round of huge M&A
deals were announced this week. The biggest was Medtronic's agreement to buy
competitor Covidien for $42.9 billion in cash and stock. Analysts suggested
that the deal would be burdened by heavy political and regulatory attention,
while also noting that there would be limited opportunities to extract cost
synergies because of the narrow product overlap between the two companies.
Level 3 Communications entered a deal to buy TW Telecom in a transaction worth
about $5.6 billion. Level 3, one of the biggest backhaul Internet service
providers, gets direct access to large- and medium-sized business customers.
SanDisk signed a deal to acquire fellow flash memory maker Fusion-io in an
all-cash deal that values it at $11.25/share, or $1.1 billion.

- Cable crossed the 1.70 level, which has been a point of resistance on
GBP/USD's upward march. The pair saw its highest level since July 2009 around
1.7050 as traders continue to position themselves for rate hikes later this
year. Multiple BoE figures through their weight behind hikes, with dove Miles
saying there was a clear chance of a hike before next spring and hawk Weale
saying that the BoE could tighten policy even with greater labor market slack.
EUR/USD continues to hold above the post-ECB low of 1.3503, and fluctuated
between 1.3510 and 1.3644.

- The slowdown in the Chinese
property sector became ever more apparent after the May price data revealed
even top-tier cities are no longer immune to the downturn. Prices rose in just
15 out of 70 cities (vs. 44 in the prior month) while falling in 35, versus
just 8 prior. Average prices across 70 cities were also down for the first time
in two years, falling 0.2% m/m. Policymakers in Beijing have yet to show any
signs of panic, with PBoC official referring to the downturn as "necessary
and inevitable," however foreign investors are taking note. May FDI slowed
to a one-year low of +2.8% YTD and outright fell by -6.7% y/y for the month of
May alone. Traders will tune in for China's flash manufacturing PMI figures on
Sunday evening for signs of further recovery in the HSBC index.

- Japan saw a mixed round of merchandise trade data, as deficit narrowed more
than expected but overall exports fell for the first time in 15 months.
Shipments to China rose just 0.4% vs 9.8% in April and US exports fell for the
first time in 17 months by 2.8%. The smaller deficit was largely the result of
the unexpected decline in imports, as Japan's crude oil intake slumped by
nearly 20%. Late in the week, Japan's Cabinet Office cut its assessment of
imports for the third consecutive month while maintaining its overall view of
economy maintaining the course of moderate recovery.

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